Introduction

United Financial Technologies understands that bank participation and support of the practices coordinated and endorsed by the CVRDN financial technology through the issuance of suitable letters of credit is as important to the CVRDNs' widespread and effective adoption in the marketplace as the licensing of the financial technology to qualified commercial companies as users.  It takes more than the desire of aggressive and prudent middle market business professionals to want to benefit from the substantial interest cost savings inherent with a CVRDN to make the CVRDN a true contender in the debt marketplace.  It also takes the active involvement of a selection of pre-qualified, sophisticated, investment-grade commercial banks, finance companies, and investment banks.  Those institutions are needed to take up a key role in the credit underwriting of those pre-qualified commercial users' projects.  With this in mind, United Financial Technologies has undertaken a wide-spread educational and recruitment program in order to illustrate the benefits of a bank or financial institution’s use of the CVRDN as an alternative tool to its traditional term loans, credit lines, and mortgage structures.

Role of Bank in Credit Enhancement Phase

During the credit enhancement phase of a CVRDN, an investment- grade Preferred Vendor bank or financial institution plays an important role.  In order for the CVRDN to function properly, the CVRDN Issuer requires a Principal Letter of Credit to be issued by a Preferred Vendor bank or financial institution to access their note proceeds as held under the supervision of the Trustee.  Procedurally, a CVRDN Issuer will approach one of our listed eligible Preferred Vendors with their use of proceeds, which may include the acquisition of real estate, equipment finance, construction or development, expansion of commercial operations, debt refinancing, or any other reasonable use.  The Preferred Vendor Principal Letter of Credit Issuer will review and evaluate the merits of the applicant's underlying assets, project, or acquisition just as it would in a conventional credit application.

Unlike traditional credit scenarios, once an application is approved, the credit will not be availed as a direct loan, credit line, or mortgage, but rather, the credit will come in the form of a standby letter of credit subscribing to the format required by the CVRDN financial technology. The Principal Letter of Credit Issuer will charge a letter of credit issuance fee (either quarterly or annually) to the credit applicant/CVRDN Issuer in exchange for the issuance of the standby letter of credit.  The Principal Letter of Credit will be utilized as a credit enhancement in substitution for an equal principal portion of the CVRDN note proceeds as held in trust.

Thereafter, the Principal Letter of Credit will permit the release of debt financing to the credit applicant’s approved project from the reserved note proceeds. The Principal Letter of Credit Issuer is fully secured by the underlying collateral/project and has received a reasonable issuance fee for its participation.  The credit applicant has accessed its cash note as raised previously at market via its sale of the CVRDNs at a more reasonable interest rate than it otherwise could have through conventional financing.

Benefits and Advantages

There are certain inherent benefits and advantages to a bank or financial institution’s participation in the credit enhancement phase of a CVRDN through the issuance of a Principal Letter of Credit as secured by the company’s underlying project, asset, or venture.  Specifically, the Principal Letter of Credit Issuer:

• Enjoys the same collateral structure while employing the same financial covenants as it would in a conventional term loan or credit line structure;
• Incurs the same credit exposure for the issuance of a letter of credit as it would under a term loan;
• Engages in the same credit underwriting process as it would in a conventional credit application;
• Enters a transaction without lending its own cash, but rather by sharing its credit;
• May reduce reserve requirements significantly when compared to a conventional fully funded term loan; these reserve requirements are different from bank-to-bank and are assessed based upon bank asset size, operating profile, etc.
• May be able to increase its credit capacity and enhance its financial performance due to the variations in reserve requirements when issuing a letter of credit;
• Receives an annual annuity of pure fee-based income instead of earning traditional interest spread income;
• May issue letters of credit with varying maturity dates, one to five years generally;
• May more readily and directly participate in a credit syndication of a given project; and 
• Will maintain a relationship with a customer even if the customer elects to use a CVRDN to repay or refinance outstanding loan debt to the bank -- in which case, the letter of credit fees replace the income stream that is lost upon the repayment or retirement of the bank's outstanding loan to the customer.

Who should be a Preferred Vendor for Principal Letter of Credit Issuance?

You should consider becoming a Preferred Vendor for Principal Letter of Credit Issuance Services if you are an investment grade financial institution, bank, investment bank, venture capital firm, or qualified fund doing business with clients or borrowers in any of the following industries or areas of business:

We encourage you to read more about CVRDNs in our Commercial Applications section of our website.  Feel free to contact us directly.  We will send you more information specifically tailored to serving as a Principal Letter of Credit Issuer and arrange for one of our Institutional Relationship Managers to contact you to discuss how the CVRDN can benefit your organization and your customers. 

United Financial Technologies is currently accepting applications for Preferred Vendors for Principal Letter of Credit Issuance.  Once qualified, we can begin referring our fully funded and qualified Licensees to your institution. Contact us soon.